Week 5 - Retirement Accounts & Fees

Question 1

How does an index fund differ from an actively managed mutual fund?

Answer 1

Index funds match the performance of a particular index and are passively managed. Active mutual funds try to outperform the index, and are actively managed (higher turnover and higher fees)

Question 2

(T/F) When saving for retirement, one should typically invest in their tax-advantaged accounts, before investing in their brokerage account

Answer 2

True; retirement accounts are given preferential tax treatment by the IRS

Question 3

Generally, the sooner you need the money you are investing, the

Answer 3

less risky it should be invested

Question 4

What are three things to keep in mind with mutual fund fees?

Answer 4

• Not all index funds and ETFs are inexpensive
• Never buy mutual funds with front or back end loads
• When comparing fees be sure to also compare similar funds

Question 5

What is the backdoor Roth IRA

Answer 5

Applies when you earn too much to contribute directly to a Roth IRA

Question 6

What are ownership investments?

Answer 6

Real estate, stock (equity)

Question 7

What is the Dow Jones?

Answer 7

30 large stocks from NYSE and NASDAQ that are price-weighted, meaning expensive stocks will move the index more than others

Question 8

Dow vs. S&P 500, which is a better barometer for the U.S. market?

Answer 8

Dow includes 30 stocks while there are 6,100+ stocks that trade on the NYSE and NASDAQ (exchanges, where stocks are sold)

Question 9

Should I just be in all equities?

Answer 9

On the efficient frontier and will give you the highest return, but is it realistic?

Question 10

What is the goal of a mutual fund?

Answer 10

Beat the market

Question 11

What is the goal of an index fund?

Answer 11

Match the market

Question 12

Data shows (mutual fund)…

Answer 12

underperforms the market, in entirety

Question 13

Data shows (index fund)….

Answer 13

matches the market, which outperforms the avg investor

Question 14

What is an ETF?

Answer 14

• A basket of securities that trades intra-day
• can execute the trade while the market is open, not just at the end of the day
• more tax-efficient than index funds
• usually low fees

Question 15

How do I pick a 401(k)?

Answer 15

• could be defaulted to target date fund
• ensure it’s a target date INDEX fund
• look at fees
• be diversified (3 asset classes min)
• keep a long-term approach

Question 16

Overconfident traders tend to…

Answer 16

• trade more
• earn less
• under diversify
• make markets volatile

Question 17

What is the disposition effect?

Answer 17

holding on to losing investments and selling winners

Question 18

Why did social security start out as a huge unfunded liability?

Answer 18

Set up as a paygo system where payroll taxes paid by current workers were used to pay current retirement benefits.

Question 19

Advertisements for online trading tend to emphasize which of the following?
a) That making your own trading decisions puts you in control.
b) That it is easy to trade online.
c) That trading online is expensive.
d) That trading is fun.
e) That the person on the other side of your trade probably knows more than you.

Answer 19

a, b, d

Question 20

Why is Social Security called a PAYGO system?

Answer 20

Because the payroll taxes paid by current workers are used to pay current retirement benefits.

Question 21

(T/F) Most people in good health should claim Social Security retirement benefits at age 62.

Answer 21

False

Question 22

(T/F) Social Security started with a huge unfunded liability because benefits were paid to retirees, such as Ida May Fuller, who had paid very little into the system.

Answer 22

True

Question 23

Psychologists find that when people are in a good mood their decision making is…

Answer 23

more spontaneous